Q: 3-28

Even though independent gasoline stations have been having a difficult time, Susan Solomon has
been thinking about starting her own independent gas station. Susan’s problem is to decide how
large her station should be. The annual returns will depend on both the size of the station and a
number of marketing factors related to oil industry and demand for gasoline. After careful
analysis, Susan developed the following table:

Size of First Station Good Market Fair Market Poor Market

Small 50,000 20,000 (10,000)

Medium 80,000 30,000 (20,000)
Large 100,000 30,000 (40,000)
Very Large 300,000 25,000 (160,000)

For Example, if Susan constructs a small station and the market is good, she will realize a profit
of $50,000.

a. Develop a decision table for this decision.

Answer:

b. What is the maximax decision?

Answer:
The maximax decision suggests to start up on opening a VERY LARGE
gasoline station, giving the highest return of $300,000.
c. What is the maximin decision?

Answer:
The maximin decision suggests to open a SMALL gasoline station with -
$10,00 return.

d. What is the equally likely decision?

Answer:
The equally likely decision advises to choose to open up a VERY LARGE
gasoline station with an average of $55,000 return.

e. What is the criterion of realism decision? Use an α value of 0.8.

Answer:
The criterion of realism decision with an alpha od 0.8 recommends to put up
a VERY LARGE gasoline station with a possible $208,000 return.

f. Develop an opportunity loss table.

g. What is the minimax regret decision?

Answer:
The minimax regret decision suggests to start-up a VERY LARGE gasoline
station with the least opportunity loss of $150,000.
Conclusion and Recommendation:

Three (3) of the decision making approaches used namely, MAXIMAX, Equally Likely,
and Minimax Regression, points to the establishment of a Very Large gasoline station for
Susan. Profit is maximized by establishing a Very Large gasoline station. Considering she
has all the resources to fund it, it is therefore recommended that the size of the first
gasoline station that Susan will establish should be Very Large.